Saving for college is best done sooner than later. If you expect a tax refund or have extra funds investing in a 529 is a great way to put money away for a future student.


What is a 529 Plan?


529 plans are state-sponsored investment accounts that can be set up for a student’s future expenses such as tuition, textbooks, computers, supplies or even room and board. The student can be your child, a relative or the child of a friend. Contributions are invested into the 529 account and earnings can be withdrawn, tax-free, provided they are used for qualified costs incurred from kindergarten through college or post-secondary education.


Who Can Contribute?


Anyone can open and contribute funds into a 529 plan and there are no income limits to worry about. However, the beneficiary can only receive $10,000 in a given year regardless of whether the funds are distributed from multiple accounts.

If withdrawals of more than $10,000 are made in a given year the earnings are included on your tax return as ordinary income and a 10% penalty is assessed.


Not Going To College?


Many people invest in a 529 plan with the intent of using it as a method of saving for college. What happens though if your child grows up and decides he or she isn’t going to college? Thankfully, the money can be used for an apprenticeship or trade school. If there is another child in the family re-naming the account with the other child as the beneficiary is also an option.

An added bonus is that some states allow residents a deduction or credit for participating in its 529 plan. The fees and incentives vary by state though. For example, New York allows an unmarried filer a $5,000 deduction on the individual’s state tax return ($10,000 if married filing jointly) while California does not allow any state tax break for participating in its plan. 

Saving for College has a list showing states that allow an income tax break for 529 contributors. It’s a good reference when researching which state’s plan is the best option for you.